1% Minimum Tax in Kenya?

The introduction of the 1% minimum tax in Kenya through the Finance Act 2020 has generated considerable debate among businesses and tax experts (source: KRA). This tax aimed to expand the tax base and institute equity and fairness among taxpayers. However, the High Court of Kenya declared the minimum tax unconstitutional, effectively halting its implementation. This article will explore the implications of the 1% minimum tax in Kenya, its objectives, and the potential impact on businesses.

The Origin of the 1% Minimum Tax in Kenya

The Finance Act 2020/2021 introduced the 1% minimum tax in Kenya, with an effective date of 1st January 2021. This tax was intended to apply at the rate of 1% of gross turnover and would not be payable by persons whose income is tax-exempt or earning employment. However, the High Court of Kenya declared the minimum tax unconstitutional on the grounds that it violated the principles of equity, fairness, and reasonableness. As of the latest update, the 1% minimum tax is not in effect in Kenya.

Objective of the 1% Minimum Tax

The main objective of the 1% minimum tax was to widen the tax base by leveling the operating playfield for business enterprises and ensuring that all persons contribute towards the government's revenue. The tax was also aimed at discouraging multinational companies from shifting profits to low-tax countries and avoiding paying higher taxes in their home countries.

Read Also: How to File Turnover Tax in Kenya

Legal Challenges Faced by the 1% Minimum Tax

The Kenya Revenue Authority (KRA) faced legal challenges in implementing the 1% minimum tax, as several organizations filed petitions in the High Court of Kenya. The court declared the minimum tax unconstitutional, citing that it violated the principles of equity, fairness, and reasonableness. The decision effectively halted the implementation of the 1% minimum tax in Kenya.

Appeal Process and the Future of the 1% Minimum Tax

Following the High Court's decision, the KRA may decide to appeal the ruling in the Court of Appeal or the Supreme Court. The outcome of such appeals will determine the future of the 1% minimum tax in Kenya. If the appellate courts uphold the High Court's decision, the minimum tax will remain unconstitutional and will not be implemented.

Impact of the 1% Minimum Tax on Businesses in Kenya

Had the 1% minimum tax been implemented, it would have had mixed impacts on businesses in Kenya. Most international and SME companies with high capital-intensive or one year of operation would have been affected by the tax. The Kenya Association of Manufacturers (KAM) criticized the tax, stating that it would hurt the economy and be a further raid on the scarce resources needed to keep businesses alive and Kenyans employed.

Read Also: New Tax Rates in Kenya

Conclusion

The 1% minimum tax in Kenya aimed to expand the tax base and foster equity and fairness among taxpayers. However, the High Court of Kenya declared the tax unconstitutional, and as of the latest update, it is not in effect. The future of the minimum tax depends on the outcome of potential appeals by the KRA. It remains to be seen if the Kenyan government will revise the tax law to address the concerns raised by the court or if the minimum tax will be permanently scrapped.

FAQs

How do you calculate minimum tax?

As per the Kenya Revenue Authority, minimum tax is calculated as 1% of the gross turnover of a business. Gross turnover refers to the total sales of a business before any deductions. So, if your business had a gross turnover of KES 1,000,000 in a year, your minimum tax would be KES 1,000,000 * 1/100 = KES 10,000.

What is the tax rate for the top 1%?

Tax rates can vary significantly by country and the structure of the tax system. In Kenya, as of 2021, the top personal income tax rate is 30%, which applies to monthly income over KES 47,057. However, it's important to note that the "top 1%" often earn income from a variety of sources and not just salary, which can be subject to different tax rules and rates.

Is 1% tax on turnover in Kenya?

Yes, as of 2021, the Kenya Revenue Authority has introduced a minimum tax that is charged at the rate of 1% of the gross turnover. This tax is payable regardless of whether or not a person makes a profit.

How much tax is deducted from a 50,000 salary in Kenya?

In Kenya, personal income tax is based on a progressive tax system. As of 2021, the tax bands are as follows:

- Up to KES 24,000: 10%


- KES 24,001 - 32,333: 15%


- KES 32,334 - 47,057: 20%


- Over KES 47,057: 30%

If you earn KES 50,000, you fall into the last tax band. However, tax is not charged at the highest rate on the entire income, but on each portion within the respective tax bands. You would also need to account for personal relief, which is KES 2,400 per month as of 2021. Please consult with a tax professional for a precise calculation.

What are the benefits of minimum tax?

The main benefit of minimum tax is that it ensures all businesses contribute to the tax revenue of a country, even those that declare losses or have tax credits that would otherwise reduce their tax liability. It helps to broaden the tax base and increase government revenue. However, it can also be seen as a burden on businesses, particularly those with low profit margins or those facing temporary financial difficulties.

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